Saturday, January 17, 2015
7:55:29 PM EDT

Bottoming Action Continues On Balance

by
Leigh Stevens

Bull markets don't die of 'age", unlike us!, but do with expectations of a recession. And a drop in oil prices isn't a reason to bring one on (a recession).
All the major stock indices broke below previously drawn up trendlines but have held various lines of support relative to recent lows and may have formed bottoms.
I'm focusing next on some fundamental commentary, as opposed to mostly technical analysis.

I have noted in prior commentaries that the current bull market is rather 'long in the tooth' at nearly 6 years, implying that maybe the odds of it (the bull market) ending could be increasing. However, I've studied bear markets cycles further and almost always find the same thing: bear markets result from recessionary periods. Overall corporate earnings in recessions start sliding, until we get negative (earnings) growth rates. It is true that very strong earnings GROWTH can be hard to maintain at the same clip year in and year out but in that case stocks will typically slow their rate of gain, not reverse it.

Ok, so if bear markets come about due to recessions on the horizon, where is the evidence of that? We don't yet see global growth slowing so much that it would put the U.S. into recession, at least at U.S. and global current growth rates. And, unlike comparable G-7 countries like Germany, (or the Swiss) or Japan, our (U.S.) economy is not driven by exports in the same way as these countries.

Lower oil prices might be a shock as we've seen, relative to the sharp increase in stock market volatility but looking out, lower energy prices are good for much of our economy. Short-term yes, it has an impact on slowing capital expenditures, on energy sector layoffs, on lower earnings for big energy companies, etc. Longer-term it's more of a boon for a consumer driven economy like ours than not.

Enough said on that but I wanted to address the fear and loathing that has been felt by investors and traders. Trader types, as seen in my (CPRATIO) sentiment indicator lean slightly more bearish than bullish but not extremely so. 'Extreme' bearishness is seen when equities' options put volume equals or exceeds total daily equities' options volume. That hasn't been seen, at least in this past week.

What we have seen is a sharp increase in volatility measures like the S&P 500 (SPX) Volatility Index VIX. Speaking of the VIX, the growth in options trading in the VIX Index has grown to a point where many individual traders are speculating on VIX's direction. Portfolio managers or institutional money is going to be the biggest users of this portfolio management tool.

I wrote my most recent Trader's Corner article (1/15) on the tremendous growth in daily options trading volume in VIX as 2014 saw average daily volume hit 632,000 contracts. Thursday saw 734,000 contracts traded (rounded to the nearest 1000) on the CBOE. VIX can largely be analyzed technically like a stock index or individual stocks and I show some examples. Moreover, I've included the contract specifications like strike prices, the multiplier ($100), how premiums are quoted, expirations, etc. Check it out if you haven't via this LINK.

I'm going to start more regular commentary on what the daily and/or hourly charts and related technical indicators might be suggesting as to the short and intermediate trends in the S&P 500 VIX volatility index.

Analyzing VIX; a most recent example:

The most recent advance in VIX, from the 17 area up to a peak Closing hourly reading at 23, advanced on less 'relative strength' on a 21-hour basis; i.e., the 21-hour RSI did not get as high as the prior rally, suggesting a bearish price/RSI divergence. These aspects are seen on my first chart below, that of the hourly VIX. Sure enough VIX retreated Friday from its recent peak around 23, as the Market rallied. It's often the case that rallies develops after VIX hits extremes around 22-23 and above; e.g., to peaks at 25-26.

I almost always use Close-only 'line' charts on weekly, daily and hourly VIX charts; ditto with VXN, the Nasdaq 100 Volatility Index. On daily charts for example the fluctuations intraday can be wide-swinging in the extreme. I'm interested in where VIX Closes for the day; the 'moment of truth' so to speak. There's less 'noise' to use Close-only charting as intraday price swings can be extreme; and often exacerbated by computerized trading models as these firms buy, sell, buy, sell, adinfinitum.

Potential near 'support' in VIX comes in around the Friday Close (21), with next support suggested in the 18 area, then at 16.
[The VIX Index is quoted in percentage points, just like the standard deviation of a rate of return, e.g. 19.] My technical take on the current VIX pattern is that because the major indexes look to be establishing a bottom, VIX may decline accordingly; i.e., due to a common inverse relationship between VIX and stock index levels.

Use of Trendlines with VIX: Sure, just like any other instrument. As seen above, VIX has fallen to an up trendline intersecting in the 21 area. I think VIX is going to fall under that line of potential support and head to the next indicated support point noted by the green up arrow around 18; over time the Index may fall further.

Reminder: ahead is a holiday shortened week, with MLK day on Monday, the 19th.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

SPX continues to find support, at least since early-January, on dips to the 2000 area, specifically to 1193-1188. 2000 is a 'must hold' support for the bulls in terms of daily and weekly Closes, although there was one Close under this key level. As always, the absence of downside follow through the following day to this suggested bottoming potential remained intact. SPX is also at an oversold RSI reading again.

The pivotal low from mid-December comes in at 1973 and prices could retest this level again certainly. I assess good potential for prices rebounding ahead to test resistance at the 21-day moving average at 2050 and then potentially on up to 2060 resistance or even extending gains to the 2080 top over time.

Per my comments above on the VIX volatility index, which tends to move inversely to prices when VIX it gets to higher extremes, this aspect also shows potential toward a bottom having formed or forming.

Bullish sentiment isn't at rock bottom but isn't showing much bullishness either. I like it. Traders tend to be 'trend followers' and don't get overly bullish on pullbacks and in potential base-building patterns. This pattern keeps me somewhat bullish on a contrarian-opinion basis.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) is mixed like all the indices but bottoming potential is seen as support/buying interest has been seen in the 880-877 area. Next support, just above 870 at the mid-December lows.

Overhead resistance comes in starting at 900-903, extending to 910.

I'd rate the potential for a mild to moderate rebound as favorable. A Close below 870, that didn't reverse back to the upside the following day would be bearish. Stay tuned for Tuesday!

THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:

The Dow 30 (INDU) Average is also hanging in at a line of support that's recently formed in the 17275 area. Next, and pivotal, support is seen at the mid-December lows in the 17100-17075 area. A decline to this area followed by an upside reversal would set up a potential double bottom. I'd rate the Dow as having better potential for at least a modest rebound than for the Dow to see another down leg.

There are not a sizable number of Dow stocks that presently seem to have enough upside potential to lead INDU out of the bearish funk the Market is in but there's 12 stocks that have further upside possibilities; i.e., DD, DIS, INTC, MMM, MRK, MSFT, PFE, PG, TRV, UNH, V and WMT. Stay tuned on others turning around that have been dragging the Dow lower.

Resistance/selling interest may come in next at 17600-17725 and next in the 17900 area.

The Dow doesn't often get to an oversold extreme in terms of the Relative Strength Index (RSI) on a 13-day basis. If and when it does again, it's been a sure-fire buy in Dow Index calls. I'd like to see 17075-17500 tested to set up a potential double bottom. Hard to say if this will happen but it would be a place to bottom fish.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) has established a line of support in the 4548-4566 area that's been traced out over the past month. COMP is also back into oversold territory again in terms of the RSI. The combination of potential price bottoming action and an oversold condition suggests that COMP could be at or near a bottom. Friday's rebound looks encouraging for the bulls.

On the upside what's needed is for a move back above 4700 and the 21-day moving average to get upside momentum going again. Next resistance then comes in what has been a lengthily period of resistance that's turned prices lower multiple times from the 4800 area.

Price action and the RSI suggest potential for a bottom to have formed or to be in process. A decisive downside penetration of recent lows would say otherwise however.

NASDAQ 100 (NDX); DAILY CHART:

The NDX 100 (NDX) has traced out a potential double bottom in the 4100-4090 area. A couple of back to back Closes below 4100 would suggest otherwise. Next lower support or a potential low 'extreme' is suggested at my lower trading 'band' or moving average envelope line, currently intersecting at 4045.

Fairly major support comes in at 4000. A weekly Close below 4000 tips the chart to bearish from a mixed sideways trading range.

Overhead resistance begins at 4200 and extends to 4255 and on up to 4300. A weekly Close above 4300 sets up potential for a next upside leg such as to 4400.

NDX is oversold again in terms of the RSI and the Nasdaq 100 volatility Index, VXN, has again climbed to the 22 area where prior bottoms have set up. Perhaps this time a more sustained rally could occur given the inverse relationship often seen with a high VIX and a possible bottom, followed by a sustained upside rebound. Stay tuned.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ chart is mixed but lows have repeatedly formed on dips to and just under 100. I've highlighted support at 99.6, extending to 98.5

Best bullish bottoming potential is seen ahead if the Q's stay above 100 going forward.

Resistance begins in the 102 area, extending to 102.6 and the 21-day moving average. Resistance at 103.6 is also apparent.

I tend to see upside possibilities if prices climb above and 'hold' the 21-day moving average. Conversely, continued defensive action and further downside potential come into play with prices below the 21-day average. This key average tends to be a definite 'trading' bullish/bearish dividing line in terms of upside/downside momentum.

On Balance Volume (OBV) continues to trend mostly lower. Watch for 2-3 days where the OBV line trends higher to suggest a bullish turnaround.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) is mixed in its pattern as RUT has trended sideways in an 1140-1220 trading range since mid-December. Of late the Index appears to be forming a potential bottom in the 1155 area, but could dip again to support around 1140, possible forming a double bottom. I'm mildly, not wildly, bullish on the prospects for RUT to work higher from recent lows.

I've highlighted key near support around 1155, extending to the 1140 area when RUT formed its last pivotal low. The Index is again at an oversold reading in the 13-day Relative Strength Index (RSI).

Resistance levels in the Russell are fairly well-defined, at 1180, 1200 and at 1220 at the top end of the aforementioned trading range or the late-December peak.